October was a two-part story for taxable bond investors.
Bravery prevailed early in the month. Then jitters set in.
The riskiest categories lost ground in most of the final two
weeks. But they still ended up topping all taxables for the
Flexible income funds, which can hold below-investment-grade
bonds, led the way, notching a 1.09% October gain, according to
preliminary Lipper Inc. data.
Emerging markets debt funds were close behind, adding
BBB-rated corporate bond funds gained 0.96%. Junk-bond funds
GNMA funds were the month's biggest losers, sinking 0.40%.
Treasury funds lost 0.27%.
"The first half of the month was risk-on," said Charles Burge,
senior manager of $560 million Invesco Core Plus Bond Fund .
"From Oct. 15 to the 29th, people changed and began to get
nervous. We gave back some gains in spread assets."
Burge added that investors began to focus again on the woes
facing the eurozone and problems in the U.S. such as the fiscal
cliff, deficit and the election, he said.
By making the presidential contest close, the October debates
injected uncertainty. Then investors saw signs that Ben Bernanke
does not want another term as Federal Reserve chairman even if
President Obama is re-elected. So whether Mitt Romney or Obama is
elected, the next Fed chairman likely won't be as big an advocate
of Fed asset purchases -- which many bond investors believe
fueled the risk-asset rally -- as Bernanke has been, Burge
The bond pullback picked up steam as many investors decided
not to fight the market. Why bother? Many already had scored
months of gains and so took some profits, Burge said.
Still, pursuit of yield in the first half of the month was
October's dominant story.
Seeking yields better than the near-zero-percent interest on
most short Treasuries, investors turned to riskier fixed-income
Burge held a 10-year Citigroup bond with a 4.5% coupon, rated
Baa2 by Moody's. As of Oct. 17 its total return for the month was
1.3%. By month-end it was 0.7%, still better than the 10-year
Treasury's 0.7% setback.
Burge said he is positioning for the year-end period, when
trading often lightens. He is trimming some corporates, including
some with European exposure, and adding to Treasuries.
Still, he will soon start to maneuver to take advantage of
bonds with higher yields and more credit risk than Treasuries,
which often do well early in the new year.
The yield curve flattened in October as the yield on two-year
notes rose 7 basis points, while the yield on 30-year bonds
inched up 3 points.
Good For Munis
Municipal bond funds had a good month on the strength of
demand outstripping supply, said Tom Metzold, who runs or co-runs
six Eaton Vance bond funds with $6.44 billion in cumulative
Supply was less than usual due to voter pressure to balance
budgets and minimize debt, he said.
Metzold expects demand to stay strong and likely even stronger
if Obama is re-elected. Year-end demand could spike as investors
seek to shelter income from an expected increase in tax rates, he